The Russian President, Dimitry Medvedev, has recently had one of his periodic spurts of positivist thinking. His two watchwords, "modernisation" and "democracy", have been echoing across the local and international media as he seeks to ward off persistent accusations that Russia has returned to its bad old ways. "I know the shortcomings of our system better, perhaps, than anyone," Medvedev told an international forum, the Valdai Club, at the beginning of September. "But I categorically disagree with those who say that there is no democracy in Russia; that authoritarian traditions still rule."

Stirring stuff, but before the president throws his cap in the air and an emptied vodka glass into the fireplace, he may like to flick through the pages of The New Nobility, which charts the brief decline followed by the resolute resurrection of the KGB as a primary political force in the country. Or rather, he may not like it. Because every page in this book gainsays his claim in the most forceful fashion imaginable that democracy is now decisive in defining Russia's political direction.

The authors describe how the KGB (or FSB as its primary reincarnation is known) suffered an acute trauma in consequence of the Soviet Union's collapse in 1990 and the failed coup of August 1991 designed by hardliners in the KGB and the military. Dazed and disoriented by the brave new world of capitalism, a majority of generals and other senior ranks scuttled the Lubyanka, the KGB's sepulchral HQ in central Moscow, and placed themselves at the service of the new moneyed class, the oligarchs and their imitators. There are apocryphal stories of how the skeletal remnants of this previously terrifying security service were compelled to sell off the Lubyanka's lightbulbs and toilet paper supply to ward off extinction.

The moment that symbolised the organisation's breathtakingly swift collapse occurred just after the 1991 coup fizzled out, when protesters hauled down the statue of Feliz Dzerzhinsky that dominated Lubyanka Square. Dzerzhinsky was the founder of the Cheka, the first post-revolutionary secret police, which was largely modelled on the Ochrana, its tsarist predecessor.

In one of countless fascinating details, Soldatov and Borogan describe how, in the wake of this event, a group of officers snuck out of the Lubyanka and unscrewed the plaque commemorating Yuri Andropov, ex-head of the KGB and briefly, in the early 1980s, general secretary of the Communist party – that is, the most powerful man in the Soviet Union. It turns out that today members of the FSB still revere Andropov as the man who could have steered the Soviet Union out of the torpor of its later years and into a dynamic future without having to experience the chaos of the 90s and gangster capitalism. Andropov, they are convinced, would have followed a Chinese model: economic transformation while retaining complete political control.

As the oligarchs started ruthlessly hoovering up the wealth of Russia's rich natural resources, they also succeeded in exerting almost total control over President Boris Yeltsin, then sinking into the final stages of alcoholism and heart disease. Under this influence, the KGB was broken up and restructured, partly in the genuine hope that the security force would never again enjoy its lost influence but partly to ensure that the new, even smaller and less representative oligarchic elite were unthreatened. It was the oligarchs who promoted a little-known apparatchik from St Petersburg, Vladimir Putin, into the centre of the Kremlin's power on the assumption that this former KGB officer would be as malleable as his predecessor. Soldatov and Borogan demonstrate just how misguided this was.

Once elected president, Putin set about quashing the political dominance of the oligarchs. They were given a choice: buckle under, go to Siberia or leave Russia. With purpose and determination, he then embarked upon the restoration of order. His old pals from the KGB (especially those from his home base) were given the keys to the Kremlin and just about every other important building in Moscow.

Soldatov and Borogan give the creepy details as to how the wild political freedoms that accompanied gangster capitalism were systematically eroded by the Kremlin's new masters. They chipped away at charismatic individuals, at alternative centres of power in Russia's vast regions, at environmental groups and human rights organisations, at foreigners and, as the authors know only too well, at the recently won media freedoms.

There are two profound differences between the KGB and the new FSB structure of power. In the Soviet Union, the KGB was clearly subordinated to the Communist party. This meant that, albeit within the framework of the country's opaque totalitarian structures, there existed some oversight of the KGB and its activities. Now the FSB leadership that so influences policy combines the two roles, which means, of course, that nobody is overseeing its activity. It is effectively free to act as it feels fit; it does so; and that means that for all of Medvedev's warm words about modernisation and democracy, he is living in cloud cuckoo land. The FSB controls all the key political offices of state (with two exceptions – one is Medvedev, the other is the mayor of Moscow, Yuri Luzhkov, and they happen to detest each other).

Second, the renaissance of KGB power has not led to a questioning of the new economic system. There is no suggestion of a return to the planned economy. Quite the contrary: the leading members of the security state are gutting its resources with the determination of the best oligarchs. The Kremlin boys are stinking rich and they have no intention of returning to the modest luxuries once enjoyed by the Soviet elite.

The New Nobility is not a work of Kremlinology. It is the product of two profoundly courageous Russian journalists who are meticulous about their reporting. They only publish information that they can properly document. They cultivate contacts inside the security services where they can; they will talk their way through to the front line of dramatic events such as the Nord-Ost siege, when Chechen terrorists took hostage an entire theatre audience.

It is because they are Russian and superbly professional journalists that this book offers dozens of insights that no outsider could provide. They are able to describe their enforced visits to the Lubyanka for interrogation, not to mention a brief spell in the dreaded Lefortovo prison for Soldatov. But perhaps most astonishing is how these two have avoided the gruesome fate that has befallen so many of their colleagues: the four o'clock knock on the door, followed by "whoosh" – erased from history.

Misha Glenny's McMafia: Seriously Organised Crime is published by Vintage.